Round one has been won by resisting natural gas shippers in the international battle over TransCanada Corp.'s attempt to create a new tolling regime on its troubled Mainline.
Canada's National Energy Board (NEB) effectively froze rates on Canada's biggest pipeline at their 2010 level by refusing to enact immediately, as an interim 2011 introductory measure, a contested deal on change made by TransCanada, the Canadian Association of Petroleum Producers (CAPP) and the Alberta government.
As of Jan. 1, the NEB decreed that the 2010 regime is staying in force until all concerned work out a more widely accepted overhaul or else steer disputed modifications to approval through its regulatory process.
"It is not appropriate for such fundamental changes to be implemented on an interim basis in the face of significant opposition," the board said. The brief ruling set no schedule or procedures for regulatory action on the pipeline reform scheme.
Instead, all concerned were urged to continue trying to work out their differences. The ruling said the NEB "notes the significant efforts to reach resolution of these difficult issues and encourages continued efforts to collaboratively address these matters through negotiations with all parties."
The decision, which is consistent with a long-standing declared preference of the NEB for ratemaking by negotiated settlements, leaves the industry grappling with effects of a 70% drop since 2005 in gas shipper use of multi-year, long-haul transportation service contracts on the TransCanada mainline from Alberta to eastern Ontario and onwards to border crossings into the United States.
The shrinkage is blamed on deteriorating Alberta production, rising domestic industrial consumption by thermal oilsands projects, and especially changing gas trade patterns brought on by shale gas play drilling and associated pipeline development.
The result has been a 75% jump in the benchmark Mainline toll between the system's southeastern Alberta inlet at Empress to its eastern Ontario outlet at Toronto to C$1.64/gigajoule (GJ) (US$1.72/MMBtu) from C$0.94/GJ (US$0.99/MMBtu) over the past five years, caused by spreading the system's revenue requirement thicker over the thinner gas traffic.
(The Canadian and U.S. dollars are currently at par. Currency differences for tolls arise because 1 MMBtu is 5% more than a GJ.)
The NEB freeze temporarily prevents another steep toll escalation by postponing a sharp increase in TransCanada's revenue requirement, at least until the pipeline can justify its forecast through the regulatory process. TransCanada said its benchmark Mainline toll is poised to jump to C$2.91/GJ (US$3.05/MMBtu).
But the board's ruling also postpones a restructuring scheme that calls for reducing the Mainline's forecast 2011 revenue requirement to C$932 million from C$1.65 billion, which would cut the benchmark toll to C$1.23/GJ (US$1.29/MMBtu).
The paring would be achieved by two sets of compensating toll increases for TransCanada services off its Mainline. One affects short-haul service in the region around the Dawn storage and trading hub in southwestern Ontario, where multiple streams of U.S. production mingle with Canadian gas from a wide range of sources including re-exports from the U.S. The second hike is a proposed surcharge on TransCanada's Nova gas grid inside Alberta.
The short-haul rate increases are projected to cost distribution companies and marketers at the consumer end of the TransCanada pipeline about $60 million a year. At the supply end in Alberta, the surcharge is forecast to be C$135 million in 2011 then rise to C$185 million for each of 2012 and 2013. Effects on tolls for particular Nova services will be partially offset by corresponding reductions in provincial royalty collections, the Alberta government said.
TransCanada, CAPP and Alberta said the pipeline regime overhaul is a fair price to pay for keeping western Canadian gas competitive in domestic and U.S. markets alike in the new era of low-cost supplies.
The resisting shippers range from Enbridge Gas, Canada's largest distributor with a Toronto and eastern Ontario franchise territory; to Alberta Northeast Gas Ltd., a coalition of 17 distributors in New York, New Jersey and New England. They are holding out for rights to shop around, potentially on new storage and delivery services for shale supplies, and claim such an extensive regime change – which also includes restructuring critical pipeline finance items such as depreciation – has to be more thoroughly examined by prolonged negotiating and regulatory processes.
The high stakes in the battle are underlined by a letter to the NEB from Brooklyn Navy Yard Cogeneration Partners LP (BNY), which has run on Alberta gas delivered under long-term supply and transportation contracts since the mid-1990s. The consequences of letting the spiral of shrinking TransCanada Mainline traffic and rising tolls continue would be "grave," said BNY, which supports the proposed regime change.
The threatened jump in tolls to C$2.91/GJ (US$3.05/MMBtu) under the old regime "would place would place BNY in financial jeopardy, increasing its expenses by over US$13 million per year," said the operation's letter to the NEB. As a non-utility generator, BNY points out it is unregulated and cannot automatically pass on to customers cost increases for its 286 MW power station or associated steam heat output. "Increases of double-digit percentages (in tolls) are truly going to lead to economic destruction not only for TransCanada but for all the shippers who cannot pass-through such increases as well," BNY warned.
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